Nike, Inc. reported third-quarter earnings that handily topped Wall Street expectations as strong momentum continued in every region outside of China, and gross margins were boosted by higher full-priced sales and healthy growth in its direct-to-consumer (DTC) business. Most encouragingly, China’s sales improved sequentially and supply chain pressures have eased.
Nike also said its move to consolidate its wholesale account base as its shifts to DTC is largely complete.
On the supply chain, CFO Matt Friend said on a call with analysts that all factories in Vietnam are operational with total footwear and apparel production in line with pre-closure volumes and its forward-looking demand plans.
“Nearly all of our supplier base is operational without restrictions, and we are working closely with our partners around the world to navigate through the most recent risks related to COVID. Inventory supply in our geographies is beginning to improve from here,” said Friend. “Transit times, however, remain elevated. And in the case of North America, transit times in the third quarter have worsened. We have taken numerous actions to address these challenges, and in many cases, to protect against lead times increasing even further. Despite these ongoing challenges, we have been able to mitigate our transit delay impact by nearly four weeks versus industry averages.”
He attributed the better-than-expected performance in the quarter to the benefits of Nike’s Consumer Direct Acceleration strategy, led by digital.
“Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies,” said Friend. “When inventory supply is available in the region, we are quickly moving it to the appropriate channels to serve consumer demand. Consumers continue to shift toward digital to find the products they love, and Nike’s digital experience continues to build deep consumer connections and capture digital market share.”
Demand for Nike, Jordan and Converse “remains incredibly strong” and the sales gains would have been higher if not for inventory shortages. He said, “Across the marketplace, holiday retail sales finished strong, and spring retail sales are off to a great start, fueled by strong demand for performance men’s running, Air Jordan 1, classics footwear, and our apparel fleece franchises.”
Friend further said Nike is sustaining a higher full-price mix with year-over-year improvement in markdown activity. Nike Digital has seen improvement in conversion rates and lower customer returns despite having lower levels of available inventory in its most desired product franchises. In Greater China, full-price selling improved year over year.
Third-Quarter Tops Estimates
In the quarter ended February 28, revenues were up 5.0 percent to $10.87 billion, just ahead of Wall Street’s consensus target of $10.6 billion. Sales were up 8 percent on a currency-neutral basis.
The gains were led by Nike Direct, which delivered a 17 percent gain on a currency-neutral basis. Nike Direct’s sales reached $4.6 billion, up 15 percent on a reported basis and making up 42.3 percent of sales.
Nike Brand Digital sales increased 19 percent, or 22 percent on a currency-neutral basis, fueled by strong demand through the Nike app. The digital growth was led by North America, up 33 percent. Double-digit digital growth was also seen in APLA and EMEA, helping offset declines in Greater China. Nike-owned stores grew 14 percent with significant improvements in traffic during the quarter.
Wholesale revenues declined one percent on a reported basis and were up one percent on a currency-neutral basis, with growth in EMEA and APLA offset by declines in North America and Greater China.
Gross margin increased 100 basis points versus the prior year, driven primarily by higher Nike Direct margins due to lower markdowns, favorable foreign currency exchange rates and a higher full-price mix, partially offset by increased freight and logistics costs.
SG&A grew 13 percent versus the prior year, primarily due to strategic technology investments, normalization of investment against brand campaigns, wage-related expenses and digital marketing investment to fuel heightened digital demand.
The effective tax rate for the quarter was 16.4 percent compared to 11.4 percent for the same period last year, reflecting a shift in earnings mix, effects of stock-based compensation and recently finalized U.S. tax regulations.
Earnings slid 3.7 percent to $1.4 billion, or 87 cents a share, from $1.45 billion, or 90 cents a year ago, but surpassed Wall Street’s consensus target of 72 cents.
By brand, revenues for the Nike Brand were $10.3 billion, up 8 percent compared to the prior year on a currency-neutral basis. By product category for Nike Brand, footwear grew 5 percent to $6.7 billion, apparel gained 12 percent to $3.2 billion and equipment jumped 36 percent to $390 million. EBIT (earnings before interest and taxes) reached $1.97 billion against $2.03 billion, a decline of 3 percent.
Revenues for Converse were $567 million, up 2 percent on a currency-neutral basis, led by strong performance in North America and Europe partially offset by declines in Asia. EBIT advanced 12 percent to $168 million from $150 million in the year-ago quarter.
North America’s Sales Expand 9 Percent
In North America, currency-neutral sales grew 9 percent for Nike Brand to $3.9 billion. EBIT was flat at $967 million against $970 million the prior year.
Momentum was seen across key product franchises across men’s, women’s and kids, highlighted by double-digit growth in key men’s running franchises like Pegasus, as well as updates on franchises like the Winflo and Zoom Air. Nike Direct grew 27 percent, led by Nike Digital’s 33 percent growth versus the prior year. The digital gains were driven by double-digit growth in traffic, strong growth in new members and member engagement and improvements in member buying frequency. Nike Digital in North America now has the highest penetration of all the geographies, representing one-third of total North America revenue in the quarter. Nike-owned stores grew 16 percent due to traffic improving toward pre-pandemic levels and successful activations in key cities during events like the Super Bowl in L.A.
North America continues to experience strong full-price realization and low markdown rates across the marketplace as inventory supply begins to improve.
“Nike-owned inventory levels increased 22 percent versus the prior year, with in-transit inventory now representing 65 percent of total inventory at the end of the quarter, as transit times are now more than six weeks longer than pre-pandemic levels and two weeks longer than the same period in the prior year,” said Friend. “In order to ensure the right assortment of products arrives on time for the fall selling season, we have moved forward our buying timelines to accommodate for longer transit times.”
EMEA Q3 Sales Climb 13 Percent
In the EMEA (Europe, Middle East and Africa) region, currency-neutral sales for Nike Brand grew 13 percent to $2.78 billion, with growth across all consumer segments. EBIT improved 34 percent to $713 million from $533 million.
Retail sales across the marketplace grew strong double-digits with improvements in full price realization and lower average markdown rates.
“Team sports continues to make its comeback and the continuation of the Champions League tournament enabled global football to drive energy across the region,” said Friend. “The momentum behind the Jordan brand in EMEA is also driving strong growth across all consumer segments, led by women.”
Nike Direct grew 22 percent on a currency-neutral basis in the EMEA region, led by growth in Nike-owned stores of 44 percent against some store closures due to COVID-related government restrictions in the prior year. Nike Digital rose 11 percent, fueled by member-only access and app-exclusive releases and another quarter of strong double-digit growth in full-price demand. Wholesale revenue grew 10 percent, led by even stronger growth rates from strategic accounts.
With a focus on the safety of its employees, stores and digital commerce operations remain paused in Russia and Ukraine. Nike’s business in both countries represents less than 1 percent of total company revenue.
China’s Q3 Revenues Decline 8 Percent
In Greater China, currency-neutral sales for Nike Brand were down 8 percent to $2.16 billion. EBIT was down 19 percent to $784 million from $973 million.
Results for this quarter were in line with expectations, with sequential improvement versus the prior quarter.
Nike’s most profitable market, which had been hit by a social-media backlash starting last year. Nike was among Western apparel brands that released statements expressing concern about reports of forced labor in Xinjiang.
“As we continued rebuilding local brand activities again this quarter, Nike was rated the No.1 cool and No. 1 favorite brand in China, creating separation and distinction versus the competition,” said Friend. The region also saw improvement in full-price realization versus the prior season.
The gains were driven by the Lunar New Year period as Nike.com saw record weekly traffic. Nike leveraged its Express Lane capabilities to design hyperlocal products with the Year of the Tiger elements, resulting in strong sell-through across men’s, women’s, kids, and Jordan.
Jordan had a record quarter for revenue in the region, growing versus the prior year through momentum in both footwear and apparel. Nike Direct in China was down 11 percent on a currency-neutral basis, with declines in both digital and physical retail channels. COVID-related lockdowns continued to create challenges for retail traffic.
Nike-owned stores were down 5 percent and Digital declined 19 percent due to the ongoing supply delays that negatively impacted the timing of product launches. Store openings included Nike Beijing, the first connected partner-operated Rise door and two new Unite doors that set consecutive records for global opening sales.
Said Friend, “Our relentless focus on sport, product innovation and our most iconic product franchises, combined with local athlete storytelling, remains a competitive advantage for us in Greater China. We are closely monitoring the current situation regarding the virus, but we are encouraged by the momentum we are building in the marketplace.”
APLA’s Q3 Sales Climb 19 Percent
In APLA (Asia Pacific and Latin America), currency-neutral sales for Nike Brand advanced 19 percent to $1.46 billion. EBIT advanced 17 percent to $478 million from $408 million.
The quarter was the largest and most profitable in the history of the APLA region. Double-digit currency-neutral growth was seen across nearly all territories, led by Korea, Mexico and SOCO. The gains reflect strength across performance and lifestyle, demonstrated by strong growth in running, fitness, Jordan and Classics.
Nike Direct sales in APLA grew 39 percent, led by Nike Digital growth of 61 percent due to record-setting member days across a number of territories, delivering more than two and a half times the demand versus a typical week. Nike-owned stores grew 17 percent while wholesale grew 9 percent.
“Our focus on localized product and content, particularly the launch of our Kwondo 1 collaboration with K-Pop star G-Dragon demonstrated yet again our deep connection to consumers,” said Friend. “It was APLA’s biggest hyperlocal launch ever, reaching 91 million users on social and 3.8 million entries across SNKRS and our marketplace partners.”
Channel Highlights
Offering some channel highlights across the Nike Brand, Friend noted that Nike Digital continues to be the company’s fastest-growing component of its marketplace. Downloads of the Nike mobile app accelerated in the quarter, and member buying frequency and average order values improved again as the brand continue to test member engagement across activity, content, community and commerce. In Q3, Nike Digital gained 3 points from the prior year and now represents 26 percent of total Nike Brand revenue.
At the store level, Nike is investing in concepts that specifically address gaps in distribution to serve growth opportunities in women’s apparel and Jordan.
The Nike Live concept is “showing promising levels” of productivity per square foot, store profitability and new member acquisition. Friend said, “We continue to obsess over the consumer experience and perfect the concept for her to maximize the incremental growth opportunity in the marketplace.” Nike will also begin testing a Jordan-only concept in North America in FY23, leveraging strong success in China, the Philippines and Korea.
At wholesale distribution, Nike has reduced the number of wholesale accounts worldwide by more than 50 percent over the past four years as part of a plan to shift away from “undifferentiated” retailers and drive DTC growth and has completed the majority of account exit.
“We are now moving into the next phase of our marketplace strategy,” said Friend. “We have finished communicating the big account pivots. And our go-forward growth plans are aligned with our wholesale partners.”
Last year, Nike stopped selling to six major accounts, Big 5, DSW, Urban Outfitters, Shoe Show, Dunham’s Sports, and Olympia Sports. It also recently moved to reduce allocations going forward to Foot Locker.
Friend said, “Wholesale partners play an integral role in our future marketplace, first, to authenticate our brands and then to create scale of distribution through a consistent consumer experience across a larger retail footprint. We will drive healthy wholesale growth with our remaining wholesale partners and recapture dislocated demand by elevating our partner’s retail environment and digitally connecting NIKE membership with their retail experience.”
He offered an example of Nike’s collaboration with James Whitner’s Whitaker Group, owner of Social Status and other sneaker boutiques. Nike recently partnered with The Whitaker Group to develop unique silhouettes of Jordan and Dunk products, as well as produce SNKRS Live content to connect the brand to important communities. Friend said, “We are committed to driving growth with partners like this as they create authentic, deeply connected consumer concepts in key cities and communities around the world.”
Full-Year Outlook
Nike continues to expect revenue for its fiscal year ended May 31 to grow mid-single-digits versus the prior year. Friend added to analysts, “As you know, comparing quarters to prior periods has not been intuitive, so we continue to look at the size, trend and health of our business, market share and profitability relative to pre-pandemic periods, and we remain confident we are on track toward our long-term financial goals.”
For the current fourth quarter, a decline in revenue is expected in North America due to year-over-year comparisons. In Greater China, another quarter of sequential improvement is expected assuming the operational impact related to recent COVID lockdowns is minimal.
Gross margins for the year are now expected to expand by at least 150 basis points versus the prior year as strong consumer demand continues to fuel high levels of full-price realization, low markdown rates and low customer returns. The benefits of price adjustments expected in Q4 are being partially offset by elevated product costs, primarily due to higher macro input costs, supply chain costs and investments to expedite delivery of products in North America.
SG&A is expected to grow mid-teens for the full year as spending normalizes and investments continue to be made in to support its ongoing digital transformation.
Friend said, “As we look ahead to fiscal 2023, we are optimistic as our brand strength is unparalleled with a strong product pipeline and momentum against our largest growth drivers. Marketplace demand continues to exceed available supply as inventory supply begins to normalize in the fourth quarter, against the context of a healthy pull market, setting the foundation for another year of strong growth. We are focused on what we can control while there are several new dynamics creating higher levels of volatility. As a result, we will provide more specific financial guidance for fiscal 2023 during our fourth-quarter earnings call.”
